Quarterly Outlook
Macro outlook: Trump 2.0: Can the US have its cake and eat it, too?
John J. Hardy
Chief Macro Strategist
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Crude oil weakens amid tariff uncertainty
Ole Hansen
Head of Commodity Strategy
Key points
- Crude oil prices have spent the past week drifting lower amid renewed demand uncertainty due to Trump's tariff threat
- Speculators rushing into WTI and Brent longs at the beginning of the month now weighing on prices through profit taking
- Trump's "drill, baby, drill" dream likely to focus most on gas to meet growing demand for power
- US crude inventories look set to rise as Canada pushes volumes south ahead of tariffs
- WTI has stabilised above USD 75, but with additional weakness potentiallly targeting USD 72.90
WTI and Brent crude oil prices have spent the past week drifting lower following a very strong start to the year that saw prices gain more than USD 10.00 on a combination of an exceptional cold winter temporarily lifting demand for heating fuels and diesel and, not least, the latest rounds of US sanctions on Russia’s oil industry, which went much further than expected. These developments underpinned prices, in the process supporting a surge in demand from momentum-focused speculators, which, in the week to 14 January ahead of President Trump’s inauguration, had lifted their combined net long in Brent and WTI crude oil futures to an April 2024 high at 470,000 contracts, or 470 million barrels. The subsequent price weakness was partly to blame on this group, as wrong-footed longs were being reduced.
The start to 2025 has so far not played out as expected according to the consensus view of a market that was bound to struggle this year with non-OPEC+ production growth - before taking into account additional supply from OPEC+ - expected to grow by 1.4 million barrels per day, thereby outpacing global demand growth, which the IEA estimates at around 1.1 million barrels per day.
However, from a strong start, the mood among crude oil traders has in the past few days shifted back to one of caution, with the focus now squarely on Washington and the increased uncertainty caused by a wave of Trump announcements following his inauguration. Not least among these is the prospect of tariffs threatening to erupt into a global trade war, which may lead to lower growth and, with that, lower demand for energy. Countering these concerns are the prospect for added sanctions against Russia, Iran and Venezuela, further reducing these countries ability to produce and export.Energy sector returns
The table below shows total returns achieved across the energy sector. While some gains have been surrendered in the past week, the year-to-date and one-year performances for crude oil look healthy. The total return includes the positive or negative impact of rolling futures contracts from an expiring contract to the next. Looking at the one-year forward curve, all the major energy contracts, excluding natural gas, will, at unchanged spot prices a year from now, deliver returns between 5.4% on RBOB and 8.7% on WTI crude oil. Meanwhile, the contango structure of the natural gas forward curve continues to challenge long-only investors, as the price a year from now needs to be 15.4% higher before breaking even. This helps explain why a 45% increase last year in the prompt futures price from USD 2.514 to USD 3.63 still, on a total return basis, ended up delivering a 28% loss.In other words, from a long-only investment perspective, do keep an eye on the forward price structure. Backwardation, often associated with tight supply, improves returns, while contango, driven by ample supply and seasonality, does the opposite.
What to make of Trump’s “Drill, baby, drill” announcement
In his inaugural address to the nation on Monday, Donald Trump brought back the rallying cry “drill, baby, drill,” a phrase that he has used in the past and which reflects his commitment to expanding domestic crude and gas production. To support such an expansion, the Trump administration rolled back restrictions on oil projects in Alaska while revoking green energy goals from the Biden era.
While it is very conceivable that US production in the next four years could increase by 3 million barrels of crude oil equivalent, we believe that most of this increase will focus on expanding gas production to meet increased demand for power in the coming years. The energy transition, regardless of the lack of support in Washington, will continue to gather momentum. The electrification of the world, including the US, poses an increased challenge for utilities to deliver power. With US demand for gasoline and diesel likely to plateau, demand for power will continue to increase, with gas, coal, renewables, and nuclear being the focus when it comes to producing that extra power
US inventories report: Canadian oil rushing south ahead of potential tariffs
Later today, the EIA will publish its weekly crude and fuel stock report, delayed by a day due to Monday’s market holiday. If data from the American Petroleum Institute is repeated, we may see the first stock increase in crude oil in nine weeks, potentially supported by weather-related developments and oil companies pushing more crude south of the border from Canada ahead of potential tariffs on imports. Gasoline and diesel stockpiles are expected to continue their recent rise amid slowing demand and relatively strong refinery activity.
WTI crude oil’s near non-stop rally since early December came to a halt last week after sellers emerged above USD 80.00 per barrel, driven by profit-taking from speculative accounts reducing their long exposure ahead of the changeover in Washington. Today, the price has been hovering around the 200-day moving average at USD 75.60, with additional weakness potentially targeting USD 72.90, as per the chart.
Recent commodity articles:
22 Jan 2025: Gold and silver see fresh gains as Trump 2.0 era begins
20 Jan 2025: Podcast: Trump 2.0 swings into action
20 Jan 2025: COT Report: Elevated commodities longs face short-term risks
17 Jan 2025: Commodities weekly: Strong January rally pauses ahead of Trump
17 Jan 2025: Podcast: Brace for Monday, as a new era begins
15 Jan 2025: Q1 2025 Commodity outlook: A bumpy road ahead calls for diversification
14 Jan 2025: COT Report: Hedge fund long jumps to 17-month high led by crude, gas and metals
13 Jan 2025: Crude oil rally amid winter demand and Russian sanctions
10 Jan 2025: Commodities weekly: Strong start to the year led by energy and metals
7 Jan 2025: COT Report: Managed money's year-end positioning in forex and commodities
20 Dec 2024: Silver's resurgence in 2024: A precious metal with an industrial edge
17 Dec 2024: Investors cash in: Gold and silver see year-end profit taking
17 Dec 2024: Podcast: A wild ride in 2025 awaits
16 Dec 2024: COT Report: Agriculture in demand; Traders lift bets against the euro
13 Dec 2024: Commodities weekly: The forward curve and impact on returns
10 Dec 2024: Brazil's coffee crisis pushes Arabica to all-time high
9 Dec 2024: COT Report: Speculators bought crude and gold: euro shorts reach 4-year peak
6 Dec 2024: Commodities weekly: Copper rises on China optimism; OPEC delay signals crude weakness
3 Dec 2024: COT: Mixed week in commodities as dollar buying continued
29 Nov 2024: Commodities take a breather after action-packed November
28 Nov 2024: Coffee surges to a 47-year high
28 Nov 2024: Choppy gold market turns to Santa for December support
27 Nov 2024: Podcast: Will gold enjoy a Santa rally for the eight year in a row?
25 Nov 2024: COT Report: USD long jumps; Mixed week in commodities
22 Nov 2024: Commodity weekly: Strongest performance since April
19 Nov 2024: Gold and silver rise on Russia-US tensions
18 Nov 2024: COT: Limited dollar demand despite strength; Acclerated metals selling
11 Nov 2024: COT: Speculators bought energy and grains, sold gold ahead of elections
8 Nov 2024: Commodity weekly: Mixed response to Trump 2.0
6 Nov 2024: Podcast: US election and the market reactions, including commodities
6 Nov 2024: Trump and Republican victories spark commodity decline
4 Nov 2024: COT: Speculators flock to dollars, exit commodities ahead of US election
1 Nov 2024: Commodity weekly: Some weakness seen ahead of critical week
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